Redeveloping Bix Bog Retailers into Housing
Big box retailers once dominated the retail market, boasting some of the most successful and largest retail brands in the U.S. Now, in 2023, millions of square feet lay empty, accepting defeat after a decade of dwindling sales, bankruptcies, and rapid store closures. But investors are jumping at the opportunity to breathe new life into the once bustling buildings through redevelopment. Particularly, investors are seeing success in converting big box stores to multifamily assets. This unique conversion strategy is new to the market but is gaining popularity, especially in states in desperate need of affordable housing.
Big Box/Retail Performance
Retail has held steady in a volatile market with record-low vacancy rates and strong year-over-year rent growth. On the other hand, sales activity has seen a significant decrease, reporting a -42% change from Q4 2022 to Q1 2023. According to CoStar, the decrease is due to the tight capital markets environment pushing interest rates up and slowing consumer spending. Only a handful of big box retailers reported positive sales growth. Target reported a 1.3% increase in comparable sales, while Home Depot reported a 4.2% decrease in sales. Retail construction is historically low, with only 51 million square feet delivered over the past 12 months, the lowest annual total on record, stated by CoStar. Demolished square footage reached over 144 million, with the majority being vacant big box stores and malls. Redevelopment of these properties is booming as adaptive reuse projects soar in both investor and consumer popularity.
This trend of large asset transformations aimed at repositioning or reimagining their best uses is prevalent nationwide.
Creative Conversions
For years, developers have been cashing in on residential property conversions. Renters are looking for more creative living spaces and enjoy the close proximity to shopping, entertainment, and dining that living in a redeveloped mall can give them. Not only can the building be converted into multifamily housing, but owners can utilize their large parking lots as well, placing additional housing on the lots or other attractions such as hotels or revamped retail centers. For example, in Milwaukee, WI, the once Grand Avenue Mall is now the 52-unit Plankinton Clover Apartments, featuring retail entryways that have been converted in private verandas. In addition, developers rebranded the leftover retail properties, giving renters access to a modern food hall, TJ Maxx, and Walgreens.
As of late January 2022, at least 192 U.S. malls were planning on adding housing, and about 33 malls had added apartments since the start of the pandemic. Source: Realogic
California is one state in particular that is depending on big box to residential conversion to help them fight the ongoing battle for affordable housing. At the beginning of July, the state passed Assembly Bill 2011, allowing the rapid redevelopment of properties zoned for retail, office, or parking to 100% affordable housing. According to the L.A. Times, one analysis reported that underutilized commercial properties throughout Los Angeles County could accommodate 1.6 million residential units.
The Cost of Redevelopment
Although the redeveloped properties can earn quite a profit, such a large project does come with some downsides. Zoning is the most common hurdle developers face when converting a commercial property into a residential building. Most of the time, the land malls and big box stores that were originally built are not zoned for residential use, and having the area re-zoned by the city can be difficult and time-consuming. In addition to zoning changes, the city must approve the site plan for a major development such as an apartment building. If the city does not support the proposed site plan, the cost, and timeline will increase for investors as construction must be reworked. Lastly, this type of development is a costly investment, and the capital needed is exorbitant, as investors are paying not only for new construction but also for the demolition of older buildings. Other considerations may include:
- Existing retail tenants nearby
- Possibility of multiple owners
- The vast differences between retail and multifamily tenants
Redevelopment projects have skyrocketed in popularity over the past few years for good reason. Adaptive reuse can enhance communities, increase sustainability, and provide much-needed solutions to city challenges. As big box retailers continue to fall, housing opportunities continue to grow. Converting large retail to apartments does have its challenges, but the reward for both tenants and owners is well worth the time and money.
